Executive Summary
Hiring your first employee in the UK creates several legal and administrative responsibilities. Before paying an employee, a business generally needs to register as an employer with HM Revenue & Customs (HMRC), establish a payroll process and prepare to report salary payments and deductions.
The main requirements include:
- Registering for Pay As You Earn (PAYE) with HMRC.
- Collecting the employee’s personal and tax information.
- Choosing payroll software or appointing a payroll provider.
- Calculating Income Tax, National Insurance and other applicable deductions.
- Providing payslips and reporting payments to HMRC.
- Assessing workplace pension auto-enrolment obligations.
- Meeting employment law, insurance and record-keeping requirements.
For foreign companies opening a UK subsidiary or expanding an existing UK operation, payroll should be established before the employee’s first payday. This helps avoid delays, incorrect deductions and compliance issues.
1. Determine Whether You Need to Register for UK Payroll
A business will normally need to register as an employer with HMRC when it begins employing staff.
This applies to UK companies hiring their first employee and can also apply when a limited company pays a director through payroll, even if that director is the company’s only employee.
The exact requirements depend on the working arrangement and the individual’s employment status.
Employee or self-employed contractor?
Before setting up payroll, establish whether the person is an employee or genuinely self-employed.
Employees are generally paid through PAYE, with Income Tax and National Insurance deductions calculated where applicable.
A genuinely self-employed contractor will normally manage their own tax affairs. However, the contractual label alone does not determine employment status. The actual working arrangements must be considered.
If the individual is engaged through an agency, an umbrella company or another intermediary, different responsibilities may apply.
Practical takeaway: Confirm employment status before deciding how the individual should be paid and reported to HMRC.
Official guidance: PAYE and payroll for employers.
2. Register as an Employer with HMRC
The first formal step is to register for PAYE as an employer.
You should normally do this before the first payday so that the company receives its employer PAYE reference and can operate payroll correctly.
You cannot register more than two months before you start paying employees.
What information is required?
The registration process will require information about the employer and its intended payroll arrangements. Depending on the circumstances, this may include:
- The company’s legal name and registration details.
- Its registered business address.
- The anticipated first payday.
- The number of employees.
- The expected frequency of payroll payments.
- Details of the person responsible for managing payroll.
The company should ensure that the information supplied to HMRC is consistent with its other business records.
What happens after registration?
HMRC will issue the relevant employer references and instructions for operating PAYE.
These details are needed to report payroll information and manage the employer’s PAYE account.
If the company needs to pay an employee before its PAYE reference arrives, HMRC provides a specific procedure involving running payroll, retaining the Full Payment Submission and submitting it when the reference becomes available. The company should follow the current instructions rather than delaying payment or omitting the employee from payroll.
Official guidance: Register as an employer.
3. Choose How to Run Payroll
Once employer registration is underway, decide whether payroll will be managed internally or outsourced to a payroll provider.
The right approach depends on the company’s internal resources, the complexity of its payroll and its familiarity with UK employment and tax rules.
| Option | Advantages | Considerations |
| In-house payroll | Direct control over payroll records and payment schedules. | Requires appropriate software, knowledge of UK rules and time to manage submissions. |
| External payroll provider | Access to specialist knowledge and support with calculations and reporting. | The company must still provide accurate information, approve payments and oversee compliance. |
| Accountant-managed payroll | Can integrate payroll with bookkeeping and wider financial reporting. | Responsibilities, deadlines and approval procedures should be agreed clearly. |
What should payroll software do?
The software should support the company’s reporting obligations and be suitable for the type of payroll being operated.
Typical functions include:
- Recording employee details.
- Calculating gross pay and deductions.
- Calculating employee and employer National Insurance contributions.
- Applying tax codes and other relevant payroll information.
- Producing payslips.
- Submitting payroll information to HMRC.
- Maintaining payroll records.
- Supporting workplace pension calculations and contributions where applicable.
If payroll is outsourced, agree who is responsible for collecting employee information, approving payroll, making salary payments, submitting reports and paying HMRC.
Outsourcing payroll does not remove the company’s responsibility to ensure its employment and tax obligations are met.
4. Collect the Employee’s Information
Before processing the first payroll, collect the information required to establish the employee’s payroll record.
This will usually include:
- Full name and address.
- Date of birth.
- National Insurance number, where available.
- Start date.
- Salary or hourly pay rate.
- Contracted working hours.
- Bank details for salary payments.
- Relevant tax information, including a P45 from a previous employment where available.
- Information needed to determine pension eligibility.
The company must also follow applicable data protection requirements when collecting and storing employee information.
What if the employee does not have a P45?
A P45 provides information about the employee’s previous employment and tax position.
If the employee cannot provide one, the employer should use HMRC’s applicable new-starter process, including the starter checklist where appropriate.
The information supplied helps determine the correct initial tax treatment. Incorrect or missing starter information can lead to temporary tax code issues that may later require correction.
Check the employee’s right to work
Employers must carry out the appropriate right-to-work checks before employing someone.
The correct process depends on the employee’s circumstances and the documents or online verification route available.
A UK payroll registration does not replace the employer’s immigration compliance responsibilities.
Official guidance: Checking a job applicant’s right to work.
5. Understand PAYE and National Insurance
UK payroll generally requires employers to calculate the deductions applicable to each employee and report them to HMRC.
The principal deductions and employment costs may include Income Tax, employee National Insurance and employer National Insurance.
Income Tax
PAYE is the system through which employers deduct Income Tax from employees’ earnings where required.
The amount deducted depends on factors such as:
- The employee’s tax code.
- Their taxable earnings.
- Their pay frequency.
- Their cumulative earnings and tax position.
- Any relevant adjustments communicated by HMRC.
The employer should use the tax code and instructions provided through the appropriate HMRC process rather than assuming every employee has the same tax treatment.
Employee National Insurance
Employees may need to pay Class 1 National Insurance contributions depending on their earnings and applicable thresholds.
Payroll software normally calculates these deductions using the relevant tax-year rates and thresholds.
Employer National Insurance
Employers may also have to pay employer Class 1 National Insurance on employees’ earnings above the applicable threshold.
This is a separate employment cost and should be included in the company’s payroll budget.
The employer’s liability may be affected by applicable reliefs or allowances. Eligibility should be checked rather than assumed.
Other deductions
Depending on the employee and circumstances, payroll may also need to account for:
- Workplace pension contributions.
- Student loan or postgraduate loan repayments.
- Attachment of earnings orders.
- Salary sacrifice arrangements.
- Other authorised deductions.
The employer must ensure deductions are legally permitted and correctly administered.
Use the correct tax-year rates
Payroll thresholds and statutory rates can change. Employers should use the rates applicable to the relevant tax year, which runs from 6 April to 5 April.
For the 2026/27 tax year, consult HMRC’s official rates and thresholds for employers.
6. Set Up Workplace Pension Auto-Enrolment
Hiring an employee creates workplace pension responsibilities even if the employee does not immediately qualify for automatic enrolment.
An employer’s workplace pension duties generally begin on the date its first member of staff starts working. This is known as the employer’s duties start date.
The company must assess its staff and determine which employees must be automatically enrolled.
Who must generally be automatically enrolled?
An employee will generally qualify for automatic enrolment if they:
- Are classed as a worker.
- Are aged between 22 and State Pension age.
- Earn at least £10,000 a year.
- Normally work in the UK.
Other staff may have the right to opt into a workplace pension, depending on their age and earnings.
The company should assess each employee using the applicable criteria rather than assuming that a single employee does not require pension arrangements.
What must the employer do?
The employer may need to:
- Select and establish a suitable workplace pension scheme.
- Assess the employee’s eligibility.
- Automatically enrol eligible employees.
- Deduct employee contributions where applicable.
- Pay the employer’s required contributions.
- Provide the required information to employees.
- Maintain records and complete ongoing pension duties.
Under the standard minimum contribution rules, employers generally contribute at least 3% of qualifying earnings for eligible members of a qualifying defined contribution scheme, with a total minimum contribution of 8%. The exact calculation depends on the pension scheme and the applicable rules.
Employers should also understand the rules for postponement, opt-outs, re-enrolment and ongoing assessments where relevant.
Official guidance: Workplace pensions for employers.
7. Provide a Payslip and Pay the Employee
Employees generally have the right to receive an itemised payslip on or before payday.
The payslip should show the required information, including gross pay and deductions. Depending on the arrangement, it must also provide the relevant net-pay information.
Before making the payment, check that:
- The correct employee is included.
- The pay period and payment date are correct.
- Salary, overtime, commission and other earnings are accurate.
- Tax and National Insurance deductions are correct.
- Pension contributions and other deductions have been processed properly.
- The net payment agrees with the amount transferred to the employee.
The company should also ensure that the employee is paid at least the applicable National Minimum Wage or National Living Wage, where relevant.
For example, from 1 April 2026, the National Living Wage rate for workers aged 21 and over is £12.71 an hour. Different rates apply to younger workers and certain apprentices.
The company should check the applicable rate and any relevant rules when calculating pay.
Official guidance:
8. Report Payroll Information to HMRC
Employers operating PAYE must report employee payments and deductions to HMRC through the appropriate payroll submissions.
The main report is the Full Payment Submission (FPS).
When must the FPS be submitted?
The FPS must generally be sent on or before the employee’s payday.
It reports information such as the employee’s pay and the deductions made through payroll.
This reporting requirement applies even if the employer pays HMRC quarterly rather than monthly.
There are limited circumstances in which late reporting is permitted. Employers should not treat these exceptions as a general extension of the deadline.
What if the company does not pay employees in a particular month?
If the employer has an active PAYE scheme but does not pay employees during a tax month, it may need to submit an Employer Payment Summary (EPS) to notify HMRC that no payment was made or to report other relevant information.
The exact reporting requirement depends on the circumstances and the company’s PAYE position.
What happens if payroll reporting is late?
Late or missing submissions can result in HMRC penalties, depending on the circumstances and applicable rules.
Incorrect reporting can also affect employees’ tax records and access to income-related benefits.
A reliable payroll calendar should therefore include both employee payday deadlines and HMRC reporting deadlines.
Official guidance: Reporting payroll information to HMRC.
9. Pay PAYE and National Insurance to HMRC
After payroll has been processed, the employer must pay the tax and National Insurance due to HMRC.
The standard payment deadline is generally the 22nd of the month following the tax month if paying electronically, or the 19th if paying by post.
Tax months run from the 6th of one calendar month to the 5th of the next.
For example, PAYE liabilities relating to the tax month ending 5 September are generally payable electronically by 22 September.
Some employers with smaller liabilities may be eligible to pay quarterly rather than monthly, subject to the applicable conditions.
The company should monitor its PAYE account and reconcile the amounts due against its payroll records and payments.
Important: Paying the employee and paying HMRC are separate obligations. Transferring the net salary to the employee does not settle the employer’s PAYE liability.
Official guidance: Paying HMRC.
10. Other Responsibilities When Hiring Your First UK Employee
Payroll is only one part of becoming an employer.
A company hiring its first employee should also consider the following obligations.
Employment contract and written particulars
The employer must provide the required written statement of employment particulars and comply with applicable employment law.
The documentation should clearly establish the employee’s role, salary, working hours, holiday entitlement, notice arrangements and other relevant terms.
Employers’ liability insurance
Most UK employers must hold employers’ liability insurance with an authorised insurer, subject to specific exemptions.
The company should confirm whether an exemption applies rather than assuming that a single employee or overseas parent company removes the requirement.
Statutory payments and leave
Depending on eligibility and circumstances, the employer may need to administer statutory sick pay, maternity pay, paternity pay, adoption pay and other statutory employment entitlements.
These responsibilities should be considered when preparing the employment budget and payroll procedures.
Workplace health and safety
Employers must meet their applicable workplace health and safety obligations, including providing a safe working environment and addressing relevant risks.
The precise requirements depend on the working arrangements and the nature of the business.
Data protection
Payroll records contain personal and financial information. Employers should ensure that access is restricted appropriately and that records are stored and retained in accordance with applicable data protection requirements.
Annual payroll tasks
At the end of the tax year, employers may need to complete year-end payroll reporting, provide employees with the appropriate documents and prepare for the next tax year.
The payroll provider or internal finance team should maintain a calendar of these obligations.
11. Special Considerations for Overseas Companies Hiring in the UK
Foreign businesses hiring their first UK employee often face additional questions about how the employment fits into their wider corporate structure.
Employing through a UK subsidiary
If the overseas parent has established a UK subsidiary, the subsidiary will generally be the employer where it enters into the employment relationship.
The subsidiary must meet the relevant UK payroll and employment obligations, even if payroll administration is managed by the parent company’s finance team.
Employing directly from overseas
An overseas company may sometimes employ an individual working in the UK without establishing a UK subsidiary. However, this can create additional questions concerning PAYE, National Insurance, employment law and the company’s wider UK tax position.
The correct approach depends on the circumstances, including where the employee works, the contractual arrangements and whether the overseas employer has a UK presence.
A company should assess these matters before the employee starts rather than assuming that an overseas payroll arrangement will be sufficient.
Remote employees
If an employee works remotely from the UK for a foreign business, the employer should assess its payroll obligations and whether the arrangement creates other UK tax or legal considerations.
A remote-working arrangement does not automatically remove the employer’s UK responsibilities.
Payroll and permanent establishment risk
Hiring a UK employee may also require the overseas business to review its UK corporate tax exposure.
The existence of an employee does not automatically create a UK permanent establishment in every case. However, the employee’s activities, authority, workplace and role in concluding contracts may be relevant.
This is particularly important where the employee conducts sales, negotiates contracts or performs core business activities for the overseas parent.
Payroll registration and permanent establishment analysis are separate matters, but both should be considered when planning a UK expansion.
12. Practical Checklist: Setting Up UK Payroll for Your First Employee
Use the following checklist before the employee’s first payday.
| Task | What to confirm |
| Employment status | Confirm whether the individual is an employee or self-employed contractor. |
| HMRC registration | Register for PAYE within the permitted timeframe. |
| Payroll system | Choose payroll software or appoint a payroll provider. |
| Employee details | Collect personal, tax and payment information. |
| Right-to-work checks | Complete the applicable checks before employment begins. |
| Employment documentation | Provide the required written particulars and employment terms. |
| Salary and deductions | Confirm salary, payment frequency and applicable deductions. |
| National Insurance | Calculate employee and employer contributions correctly. |
| Pension duties | Assess eligibility and establish the required pension arrangements. |
| Payslips | Arrange for compliant payslips to be issued. |
| HMRC reporting | Submit payroll information on or before payday, where required. |
| HMRC payments | Establish the process for paying PAYE and National Insurance liabilities. |
| Insurance | Check employers’ liability insurance requirements. |
| Record keeping | Maintain payroll and employment records securely. |
| Ongoing calendar | Record monthly, quarterly and annual payroll deadlines. |
Completing these steps before the first payday can help the business establish a reliable payroll process from the beginning.
13. Frequently Asked Questions
Do I need to register for PAYE before hiring my first employee?
You should register as an employer with HMRC before the first payday. You cannot normally register more than two months before you start paying employees.
It is sensible to begin preparing the registration and payroll process once the start date is confirmed.
Can an overseas company pay a UK employee without a UK subsidiary?
Potentially, but the correct arrangement depends on the circumstances. The overseas employer may have UK payroll, National Insurance and other legal obligations.
The business should assess its position before the employee starts work.
Does a company need payroll if its first employee earns below the Income Tax threshold?
An employee’s earnings being below the Income Tax threshold does not automatically remove all payroll obligations.
Depending on the circumstances, the employer may still need to record and report the employee’s pay, and National Insurance or pension obligations may apply.
When must the employer submit payroll information to HMRC?
The Full Payment Submission must generally be submitted on or before payday. Specific exceptions exist, but employers should follow the applicable reporting rules.
Does the employer have to provide a workplace pension to its first employee?
The employer’s pension duties generally begin when its first employee starts work. It must assess the employee and comply with the applicable auto-enrolment and pension requirements.
Whether the employee must be automatically enrolled depends on the relevant eligibility criteria.
What happens if payroll is submitted late?
Late reporting can result in HMRC penalties, depending on the circumstances. It can also affect the employee’s tax records and income-related benefits.
Employers should establish a process for checking submissions and resolving rejected or missing reports promptly.
Can an accountant manage payroll on behalf of the company?
Yes. An accountant or payroll provider can manage payroll calculations, reporting and related administration.
However, the company should agree responsibilities clearly and ensure that the information provided is accurate and that payroll obligations are fulfilled.
Does hiring a UK employee create a UK permanent establishment?
Not automatically. The employee’s role, activities, authority and working arrangements may be relevant to the permanent establishment analysis.
Overseas companies should assess this separately from their payroll registration obligations.
Conclusion
Setting up UK payroll for the first employee requires more than arranging a salary payment. The employer must establish the correct employment arrangement, register for PAYE, collect employee information, calculate deductions, report payments to HMRC and address workplace pension and employment obligations.
For overseas companies, the process also requires consideration of how the UK employment fits into the wider corporate structure and whether additional UK tax obligations may arise.
Establishing payroll correctly before the first payday helps reduce the risk of reporting errors, missed deadlines and unexpected liabilities.
FKGB Accounting supports international businesses with UK payroll, bookkeeping, VAT, statutory accounts and Corporation Tax compliance. A clear payroll process can help overseas CFOs manage their UK workforce while maintaining oversight of the company’s wider financial obligations.
To discuss your UK operations, book a meeting through our online calendar or contact us by email for a confidential consultation: David.levy@fkgb.co.uk
